"If the company violates the law, can you be held financially accountable? Yes, sometimes."
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Federal Labor Law Update
Executives Personally Liable
For Employee Wages
Of Bankrupt Company
By Christopher W. Olmsted
State and federal employment law is complicated and compliance can be tricky. Your company can be hit with expensive lawsuits. But what about you, personally? If the company violates the law, can you be held financially accountable? Yes, sometimes. A recent Ninth Circuit Court of Appeals case titled Boucher v. Shaw illustrates how certain company managers may be held personally liable for violations of federal wage and hour law.
A Casino Craps Out
Castaways Hotel, Casino and Bowling Center hit hard times in 2003 and had to file a Chapter 11 bankruptcy. At the time of bankruptcy, some employees were owed wages.
Since the Nevada casino was bankrupt, three former employees decided to sue the Castaways’ individual managers for unpaid wages under state and federal law. They filed a class action lawsuit on behalf of all unpaid employees.
The employees sued three execs. They sued the Chief Executive Officer, who owned 70% of the company’s stock, the labor relations manager, who owned the remaining 30%, and the Chief Financial Officer.
The federal district court in Nevada dismissed the case. It ruled that neither Nevada state law nor the federal Fair Labor Standards Act (FLSA) gave the employees a right to recover wages from the mangers.
The employees appealed to the Federal Court of Appeals for the Ninth Circuit.
FLSA Employer Liability For Wages
The FLSA requires “employers” to pay wages to employees. It provides that “[e]very employer shall pay to each of his employees who in any workweek is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce,” a minimum wage. (See 29 U.S.C. § 206(a)).
“Any employer who violates the provisions of section 206 or section 207 of this title shall be liable to the employee or employees affected in the amount of their unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages.” (See 29 U.S.C. § 216(b)).
So “employers” are liable; but exactly who is an “employer?”
Who Is An “Employer” Under the FLSA?
The employees argued that the three Castaways managers were individually liable for unpaid wages as “employers” under the FLSA.
The FLSA defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee . . . .” (See 29 U.S.C. § 203(d)).
In determining whether individual managers can be held liable for unpaid wages, the appellate court reviewed earlier court decisions expressing the broad policy of getting workers paid. “The concept of ‘employer,’” wrote the court, “is to be given an expansive interpretation in order to effectuate the FLSA’s broad remedial purposes.”
The court concluded that in some cases, managers can be held personally liable for unpaid wages. The key is how much control the managers have over the employment relationship. Where an individual exercises “control over the nature and structure of the employment relationship,” or “economic control” over the relationship, that individual is an employer within the meaning of the FLSA, and is subject to liability.
The court looked to a 1999 case titled Lambert v. Ackerly. In that case, the court upheld a finding of liability against a chief operating officer and a chief executive officer where
the officers had a “significant ownership interest with operational control of significant aspects of the corporation’s day-to-day functions; the power to hire and fire employees; the power to determine salaries; and the responsibility to maintain employment records.”
In the present case, the employees alleged that one manager was responsible for handling labor and employment matters at the Castaways; another chairman and chief executive officer; and the third was the Castaways’ chief financial officer and had responsibility for supervision and oversight of the Castaways’ cash management. The CEO owned 70% of the company, and the labor manager owned 30%. All three defendants exercised control over the employee’s employment relationship. Accordingly, the court concluded that the employees had alleged a proper claim against the managers.
The case has now been remanded to the trial court for further proceedings. Although the employees have stated a valid legal claim, they still have to prove their case. It remains to be seen whether the managers will ultimately be held liable for the wages.
The Bottom Line
The bottom line is that under the FLSA, individual managers can in some circumstances be held personally liable for unpaid wages. An officer or agent who has an ownership interest in the corporate employer and operational control of the corporation's business and payroll practices is particularly susceptible to being deemed an “employer” under the FLSA. But even if the manager does not have an ownership interest, she may still be held liable if she has day-to-day operational control of the company, or is responsible for finances or for paying employees.
In the current economic climate, there is an increased likelihood that employees will assert claims against managers of financially troubled businesses. As always, executives should make sure that priority is given to paying employee wages, and of course rely on the advice of employment law experts to avoid inadvertent violations.
Related article: Can Managers Be Held Personally Liable For Wage and Hour Violations Under California Law?
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This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2009 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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